Galahad 20/06/2017. The inpatriates tax regime after the 2017 Finance Bill: an increasingly attractive mechanism

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1 Galahad 20/06/2017 The inpatriates tax regime after the 2017 Finance Bill: an increasingly attractive mechanism 3 Niclas Pregliasc Partner pregliasc@galahad-legal.cm The inpatriates tax regime as prvided fr by Article 155 B f the French Tax Cde is ne f the mst efficient tax exemptin mechanisms currently in frce under French tax law. It results frm varius imprvements intrduced since 2003, up t and including the latest additins applied by the 2017 Finance Bill Histry f the special tax regime Originating frm the Amending Finance Law , this tax regime had riginally nly prvided fr a tax exemptin n additinal cmpensatin items relating t inpatriatin, paid t emplyees r t crprate fficers wh were nt resident in France fr tax purpses during the 10 year perid prir t their emplyment in France. The prcess f inpatriatin invlves the relcatin f freign emplyees r managers t the parent cuntry f the rganisatin (i.e. France). Frm , the perid f time required nt t be dmiciled prir t their emplyment in France was reduced frm 10 t 5 years and an additinal exemptin n payments fr days wrked utside f France was intrduced. In , the tax system was extensively reshaped t include bth individuals directly recruited abrad and the self-emplyed. Additinally, it als intrduced a partial exemptin fr "passive" incme earned r received utside France. Finally, in 2015, the Macrn Law 4 reduced the cnsequences assciated with a change in rles within the same cmpany r the same grup fr inpatriates. The 2017 Finance Bill 5 has further reinfrced the attractiveness f the tax regime by extending the maximum perid f its applicatin frm 5 t 8 years. Sme cmpanies can nw gain a direct financial advantage frm this tax regime: there is nw an exemptin f payrll tax ( Taxe sur les salaires ) n the s-called inpatriatin premiums, i.e. cmpensatin items relating t pay as frm 1 January These new measures, althugh nly applicable t inbund expatriates/inpatriates wh started wrking in France n r after 6 July 2016, make this tax regime even mre advantageus. Hwever it is still relatively unknwn t cmpanies recruiting eligible individuals and t the ptential beneficiaries themselves. 1 Law dated 30 December Amending Finance Law fr 2005 (Law dated 30 December 2005). 3 Law t mdernise the ecnmy dated 4 August Law dated 6 August Law dated 29 December 2016, art

2 Emplyees and crprate fficers benefiting frm the tax regime Article 155 B f the French Tax Cde prvides fr a number f time-sensitive ptins fr incme tax exemptin benefitting the categry f taxpayers knwn as inpatriates. The system can apply t emplyees and t crprate fficers 6 wh meet the fllwing cnditins: have a fixed-term r permanent emplyment cntract in a cmpany based in France either thrugh a cmpany based abrad, r recruited directly by the cmpany based in France 7 ; have nt been tax dmiciled in France within the meaning f article 4 B f the CGI, r been resident in France within the meaning f the internatinal tax agreements during the five calendar years prir t the year in which they assumed their duties in France 8 ; have designated France as their tax dmicile 9 and residence within the meaning f the internatinal agreements, frm the time f their appintment in France 10. This cnditin is lsely interpreted by the tax authrity, which has specified that the tax system culd apply t individuals wh did nt fix their tax dmicile in France at the same time as they tk up their pst 11 : frm the year f their appintment if the inpatriate settled in France during the calendar year f their appintment r the fllwing year 12 ; frm the year they fixed their tax dmicile in France if they settled in France after the end f the calendar year in which they tk up their pst. It is imprtant t nte that individuals fulfilling these cnditins are eligible fr this tax system regardless f their natinality. As a cnsequence, the tax system can be applied t freign, as well as t French natinals. It shuld be kept in mind that, subject t meeting specific cnditins, nn-salaried wrkers having assumed their duties in France between 1 January and 31 December 2011 may equally benefit frm the tax system fr a perid f 5 years. Tax exemptins n incme prvided fr by the regime Emplyees and crprate fficers wh meet the cnditins abve qualify fr the fllwing exemptins: Exemptin fr supplementary bnuses/premiums directly linked t inpatriatin, r inpatriatin bnuses, subject firstly t such bnuses being prvided fr in their emplyment cntract r crprate appintment (r in a rider t such cntracts) and secndly, t their bnuses being determined 14 prir t the inpatriate cmmencing his duties in France 15. Fr inpatriates recruited 6 Managers f capital cmpanies listed at 1, 2 and 3 f article 80 ter f the CGI. 7 BOI RSA-GEO n 40 t BOI RSA-GEO n 130 t Within the meaning f a and b f part 1 f article 4 B f the CGI: nly individuals whse husehld r main place f abde is in France and wh are perfrming a prfessinal activity as their principal activity are eligible fr the regime (BOI-RSA-GEO , n 170) 10 BOI RSA-GEO n 130 t BOI-RSA-GEO ; n BOI-RSA-GEO ; n 240. This tlerance des nt cncern exemptins applicable t passive revenues and t capital gains. 13 Law dated 4 August n the basis f bjective criteria 15 BOI RSA-GEO n 40 t 70. 2

3 directly abrad by a French cmpany, this bnus may be assessed at a fixed amunt f 30% f their remuneratin 16. It is imprtant t nte that this fixed percentage assessment cannt apply t individuals assigned by a freign cmpany t a French cmpany. The respnsible administrative bdy in France has thus specified that it culd nt in principle apply t intercmpany pstings. Exemptin f the prtin f their salary exclusive f the inpatriatin bnus, which crrespnds t days wrked abrad during the tax year 17. A 50% exemptin fr passive earnings paid by an entity based in a State that has a tax agreement with France cntaining an administrative assistance clause with a view t measures against fraud r tax evasin. This partial exemptin is aimed at certain intellectual r industrial prperty prducts 18, earnings frm capital assets (particularly dividends and interest) and capital gains frm sales f securities and wnership interests abrad. These exemptins nly relate t incme tax and have n effect n scial security cntributins r scial charges n investment incme frm assets r investment prducts t which they are subject. It is equally imprtant t nte that inpatriate emplyees and fficers may, during the perid f applicatin f the system, subject t certain limits 19, deduct cntributins paid t the supplementary pensin and welfare schemes in which they participated befre arriving in France 20. In additin, individuals benefiting frm this tax regime can, in practice, als benefit frm the prvisins f article 885 A f the CGI (this legislatin applies t individuals wh were nt tax dmiciled in France fr at least 5 years prir t becming s). In this regard, nly their prperty held in France can be used t determine their assets liable fr ISF [slidarity tax n wealth], which is calculated up t 31 December f the fifth year fllwing the year in which their tax dmicile was fixed in France. Cnversely, prperty lcated utside France held by these individuals is neither subject t this tax nr taken int accunt when assessing whether they have exceeded the tax threshld. The cap n exemptins Exemptins are capped by in tw ways: Firstly, the inpatriatin bnus exemptin is limited by reference t emplyees wh have equivalent pay but d nt benefit frm this status: the inpatriate s pay, after deducting the inpatriatin bnus, shuld thus be at least equal t that received in respect f equivalent psts in the same cmpany, r failing which in similar cmpanies based in France, by emplyees wh are nt inpatriates. The tax authrity accepts that the reference pay in questin shuld be equal t the lwest pay received by an emplyee with experience cmparable t that f the 16 BOI RSA-GEO n 80 t BOI-RSA-GEO , n 220 and fllwing; in accrdance with I. 4, f article 155 B, this exemptin cannt be added t the exemptin f expatriatin bnuses prvided fr by article 81 A II f the CGI Prducts referred t in article 92, 2-2 and 3 f the CGI. 19 These limits are prvided fr in the furth paragraph f Article 83 1 quater f the CGI and the secnd and third paragraph f article 83 2 f the CGI. 20 Article ter; this deductin is accepted s lng as the regimes meet the cnditins set by directive 98/49/EC dated

4 inpatriate and having equivalent duties in the cmpany r a similar cmpany based in France, during the years in questin r during the three preceding years 21. After applying this first ceiling, beneficiaries must pt fr ne f the fllwing tw limiting mechanisms: an verall ceiling f 50% f their taxable pay befre applying the system 22 ; r a ceiling calculated accrding t the prtin f their pay which relates t days wrked utside France: this ceiling is equal t 20% f their taxable pay minus the amunt f the inpatriatin bnus; The maximum perid f applicatin f the tax regime Taking int accunt the adjustments made by the Finance Act 23, it is nw imprtant t distinguish whether the inpatriate tk up the appintment in France befre r after 6 July The system may apply t emplyees r crprate fficers wh tk up their pst befre that date up t 31 December f the fifth year fllwing the year f their appintment. Fr thers, this tax system can nw be applied up t 31 December f the eighth year fllwing the year f their appintment. This tax regime will cease t apply if any f its cnditins are nt met. One shuld hwever bear in mind that, after the Macrn Law 24, the General Tax Cde [CGI] expressly prvides that a change f pst within the same cmpany r within the same grup f cmpanies during the 5-year perid des nt call int questin the applicatin f the regime. This additin nly applies t changes in pst that ccurred after 7 August Finally, it shuld be nted that currently the 5-year perid prvided fr by article 885 A f the CGI, during which nly prperty and assets lcated in France are liable fr Wealth tax (ISF), has nt been extended t 8 years. Accrdingly, individuals wh were appinted after 6 July 2016 may qualify fr the inpatriates tax regime up t the end f the 8-year perid, but their ISF tax base will be assessed by taking int accunt their prperty lcated in France and utside France after the 5-year perid. By way f example, an individual recruited by a French cmpany and having fixed their tax dmicile in France in December 2016 will theretically benefit frm the inpatriates system until 31 December On the ther hand, their ISF taxable assets will include their assets utside France as frm ISF 2022 (i.e. ISF n assets held as at 1 January 2022). Exemptin frm payrll tax Inpatriatin bnuses paid after 1 January 2017 t emplyees r crprate fficers appinted n r after 6 July 2016 are exempt frm payrll tax 26. This exemptin, prvided fr by the 2017 Finance Act, des nt hwever apply t pay relating t days wrked abrad. Furthermre, fr individuals recruited directly frm abrad by a cmpany lcated in France, the amunt f the bnus exempted frm payrll tax is equal t 30% f their pay, regardless f the level f tax incme they have selected. 21 BOI-RSA-GEO , n BOI-RSA-GEO , n Law dated 29 December Law dated 6 August 2015, art Fr the applicatin f this measure, the ntin f a grup is cnstrued as the grup frmed by a cmpany and the cmpanies it cntrls, under the cnditins defined in article f the cde de cmmerce [business law]. 26 Law dated art. 71; article 231 Q bis f the CGI [General Tax Cde]. 4

5 The declaratin requirements f beneficiaries: declaratin f selected ptins fr assessment f bnus and exemptin cap N prir apprval is required in rder t benefit frm the inpatriates regime. On the ther hand, beneficiary emplyees r crprate fficers are required, when filing their tax returns, t pt fr either the verall cap n exemptin at 50% r the 20% ceiling regarding pay fr days wrked abrad. Fr emplyees recruited directly abrad, their declaratin must als indicate their selected ptin fr assessing the inpatriatin bnus accrding t the actual r inclusive mde (i.e. 30% f their taxable pay). The amunt f the inpatriatin bnus and expected pay fr days wrked abrad must als be declared in the tax return (up t 2015, the relevant line was DY n frm 2042 C). The distinctin between the taxable fractin and the exempted fractin f incme referred t as passive must als be included in the 2047 frms (dividends and interest in particular) and 2074 IMP (capital gains n sales made by inpatriates) 27. The declaratin requirements f emplyers: the ften neglected calculatin and declaratin f all exempted amunts Emplyers, still bund in respect f 2016 t submit a DADS-U [unified-annual declaratin f scial data], and emplying individuals wh benefit frm the inpatriates tax system, shuld, in principle, as fr the DSN [nminative scial data declaratin], distinguish between the amunt f salaries subject t incme tax and the ttal amunt exempted under this system. Thus, the inpatriatin bnus shuld appear in the sub-heading S40.G the exempt inpatriatin bnus, but als the prtin f remuneratin pertaining t days wrked abrad by the interested parties. One shuld bear in mind that many cmpanies still neglect t calculate these benefits in a way that takes int accunt the entirety f the mechanism. It is thus frequently the case that while inpatriatin bnuses are ften distinguished frm the taxable salary, where these are prvided fr in the emplyment cntract r crprate appintment, French cmpanies recruiting directly frm abrad ften neglect the ptin fr emplyees r crprate fficers t benefit frm the exemptin f a bnus set at 30% f their pay. Finally, the tax exemptin relating t days wrked abrad is als ften verlked by the emplyer fr a variety f reasns: a lack f understanding f the system, lack f data relating t the individuals cncerned travelling abrad within the cmpany, and failure t calculate this prtin f their pay. It is imprtant t remember that any errr made by the emplyer in calculating and declaring the exemptin fr which inpatriates qualify (fr example in the absence f a calculatin f the pay fr days wrked abrad) will have an impact n the pre-cmpleted inpatriates declaratin. These errrs culd lead t these emplyees being ver-taxed if they are nt given the pprtunity t crrect their declaratin themselves. When tax at surce will cme int frce, any errr cmmitted in this respect will be paid fr each mnth by an excess deductin f tax n incme. On the cntrary, fr inpatriates wh rectify their pre-cmpleted declaratin, the discrepancy between the incrrect figures declared by their emplyer and the sums declared by the beneficiary will autmatically be reassessed by the tax authrity. If this crrectin is nt accepted, the inpatriate must 27 Frms used fr the declaratin f incme fr

6 justify their refusal, and, if apprpriate, prvide a certificate frm their emplyer explaining this discrepancy. In additin, Emplyers may be liable fr tax penalties prvided fr by article 1729 B f the CGI fr missin r inaccuracy 28. Optins fr regularisatin within the regime Finally, it is imprtant t remember that individuals wh qualify fr this tax regime but wh have nt pted fr it (r wh have nly partially benefited, fr example by mitting t request exemptin fr passive incme, r by failing t rectify incrrect amunts cmmunicated by their emplyer t the tax authrity) may, within a limitatin perid require their previus declaratins f incme t be crrected in rder t btain reimbursement f tax n incme that was incrrectly paid. The tax authrity generally lks kindly upn such requests, as lng as the taxpayer can prve they have met all the necessary cnditins Niclas Pregliasc Partner pregliasc@galahad-legal.cm 28 A fine f 15 per inaccuracy r missin; the minimum amunt fr this fine is set at 60 and the maximum at 10,000. 6